The “Old” Business Model
The “Old” Business Model
It Still Has Value!
The Old Model
The current business model that is and has been the mainstay of the business world since Edward Taylor’s time is best represented by a large “U” shaped graph in an X-Y coordinate system. The “X” axis is market share - meaning how many people are buying the product or service. The “Y” axis is profit.
The “U” shaped graph has two peaks at the top of the “U”. The inner one - the one with the high Y or profit values corresponds to businesses that compete by selling an item at good profits. But this end of the curve is also low on the “X” axis values meaning that it has little market share.
This is the “niche” market. To a small but focused market, you can sell a service for a high profit. Let’s look at the drug companies as an example. They make a drug that addresses a disease that only 10,000 people in the whole US have a need for. They ask and get $5.00 per pill. A small market that has a narrow but high demand for a product can command a high price for that product.
The other end of the “U” is also a high profit point but with much improved market share. This is characterized by Japanese autos. The price is not the lowest on the market but they still command a large market share. Why? The answer is that at this end of the graph, businesses “differentiate” themselves in some manner from their competition in order to command a price that is not the lowest. In the case of Japanese cars, the differentiation is “quality”. Buyers will pay more for perceived or real quality because that is important to them. Japanese cars have invested in both the real and perceived sense of quality.
Volvos, on the other hand, differentiate themselves as the “safe” car. Mercedes Benz is the “rich man’s car”. Land Rover is the car of choice for safaris…and so on… All these cars are significantly more expensive than their competition but they still command a large share of the market because they differentiate themselves in the eyes of the buyer.
The bottom of the “U” is characterized by low profits and only a medium market share. A good example of this is McDonald’s hamburgers which are sold at nearly the cost to make them. There is very little profit because they are so cheap. (McDonald’s, as a company, makes their profits off drinks and fries). Their market share is a portion of the fast-food market in that they are appealing to those buyers that want that kind of food, fast and cheap. This means that they are very vulnerable to price fluctuations from their suppliers and from their competition.
Another aspect of the older business model is that any given marketplace can typically support up to three top competitors. Others can and will enter the market but they will play a distant second place to the top three.
Sears-Wards-Pennys…..
Ford-Chevy-Chrysler…..
McDonalds - Burger King - Wendy’s.
In some localized markets, the top three may change but the forth one in the list will always be far down in the market share and profits from the top three. It has been a fact of business for the past 75 years…..